Thursday, September 2, 2010

Risk Arb: Lions Gate (LGF) – Icahn Persists

It's time to resume our review of Carl Icahn's pursuit of Lions Gate Entertainment Corp (LGF). We have discussed his unsolicited offer several times in the past, and new events (some would say Icahn's stubbornness) have brought about more details to cover. For a quick review, Icahn announced a tender offer on February 16 of $6/share to increase his holdings from 18.9% to 29.9%. Icahn increased his proposal to $7/share on April 15 for all the shares he did not already own. By the June 16 tender expiration, Icahn owned 31.8% of LGF. Icahn lowered his offer to $6.50/share on July 20, at which point he already owned 37.9%. Icahn also disclosed his intention to replace the entire LGF board. On the same day LGF announced the completion of a "deleveraging transaction" where $100 million of its senior subordinated notes were converted into common shares at an effective conversion price of $6.20/share. This transaction was done with Mark Rachesky, an LGF board member, which increased his holdings from 19.6% to 28.9%. It also diluted Icahn's stake from 37.9% to 32.8%.

On August 31, Icahn increased his offer to $7.50/share. The revised offer is conditioned on there having been validly tendered the number of shares to constitute 50.1% ownership by Icahn. It is also conditioned on (now here is the big one) that the 16 million shares issued to Rachesky are either (i) rescinded prior to the expiry time, so that such shares are no longer outstanding; or (ii) reformed to convert such shares into a new class of non voting common shares. This offer expires on October 22. In typical Icahn prose, the announcement added "Given its recent decision to issue shares to an insider at $6.20 per share without conducting a market check, we would normally expect that the board must recommend that shareholders accept our offer of $7.50 per share, but with this board anything is possible. The Icahn Group believes that this board will stop at almost nothing to entrench its position at the expense of shareholders. However, we believe that even these directors will realize that their fiduciary duties dictate that they not deprive shareholders of the opportunity to receive a significant premium for their shares and therefore not enter into further inappropriate transactions which would breach the conditions of the offer." On the $7.50/share news, LGF closed at $7.14/share on August 31, up 10% for the day.

Icahn has very likely demanded too much in his latest missive. Asking Rachesky to either undo his transaction or give up voting rights is a tough sell. We don't think it will happen. Icahn has changed conditions of his offer several times in the past. He could waive this condition and increase his offer again, thereby paving the way for a deal. Remember, Rachesky is supportive of current management and Icahn is not. It's a battle of the old guard versus the new, and this is the first time Icahn is not in the "old" camp.

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About the Authors

Hunter is the founder of the Distressed Debt Investing Blog and the Distressed Debt Investors Club. He has worked on the buy side for the past 7 years in high yield and distressed debt investing.

Edward has been a professional investor for four years, focusing mainly on the event-driven space. His investment philosophy is value-based, and he spends the majority of his time identifying near-term catalyst based opportunities.

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hunter [at] distressed-debt-investing [dot] com